The U.S. Federal Reserve’s (Fed) aggressive interest rate hike cycle, which began in March last year and had an impact on the crypto market, has come to an end, according to several investment banks. The Fed raised its benchmark fed funds rate by 25 basis points to the 5.25%-5.5% range in July, bringing the cumulative tightening since March 2022 to 525 basis points. ING’s Chief International Economist James Knightley said, On balance, this [Friday’s nonfarm payrolls] report doesn’t suggest any need for the renewed impetus for the Fed hiking interest rates again in September.
Knightley added that a couple more 0.2% month-on-month consumer price index (CPI) prints will dampen the talk of a rate hike in September. July’s CPI data, due later this week, is likely to show the inflation rate held steady at 0.2% month-on-month in July, and August inflation numbers will also be available prior to the Fed’s upcoming rate-setting meeting next month.
The tightening of financial conditions of late, due in part to the dollar index’s 2.6% rise over the past three weeks and the 10-year Treasury yield’s 40 basis points rise to 4.10%, should allow the Fed to hold steady. Wells Fargo’s economic research team said, The fact that banks anticipate tightening lending standards further in the second half of the year increases the likelihood of an additional drag on economic growth.
With the July rate hike to the 5.25%-5.5% range, the real or inflation-adjusted benchmark interest rate has climbed to over 2%, the highest since 2007, according to data tracked by Piper Sandler. This weakens the case for continued rate hikes. Positive real interest rates are a widely accepted measure of a restrictive policy or measures that put inflation back on track to the Fed’s target of 2%. Piper Sandler’s research note dated July 28 said, Our base case is that this was the Fed’s final rate hike for this tightening cycle, as the real Fed funds rate has climbed to its highest level since 2007 (right chart), suggesting economic conditions have turned notably restrictive.
A potential end of the tightening cycle does not necessarily mean a quick pivot to liquidity-boosting rate cuts and a return to the 2020-21 like bull market. BlackRock said in a weekly market note on July 31, We see central banks being forced to keep policy tight to lean against inflationary pressures. This is not a friendly backdrop for broad asset class returns, marking a break from the four decades of steady growth and inflation known as the Great Moderation.